Paul Mylchreest

In the “new normal”, the role of gold involves a complex web of interactions between Japanese equities, repo financing, BoJ monetary policy meetings and anomalies in the silver market.And you thought gold was only for wealth preservation…

From an anonymous source prior to the major lows in the gold price more than a decade ago:

“Someone once said, ‘no one wants gold, that’s why the US$ price keeps falling.’ Many thinking ones laugh at such foolish chatter. They know that the price of gold is dropping precisely because ‘too many people are buying it’! Think now, if you are a person of ‘great worth’ is it not better for you to acquire gold over years, at better prices? If you are one of ‘small worth’, can you not follow in the footsteps of giants? The real money is selling ALL FORMS of paper gold and buying physical! Why? Because any form of paper gold is losing value much, much faster than metal. Some paper will disappear all together in a re of epic proportions! The massive trading continues at LBMA,but something is now missing…We have reached production costs…The great mistake by the BIS was in underestimating the Asians. Some big traders said they would buy it all below $365+/- and they did. That’s what forced LBMA to go on a spree of paper selling! Now, it’s a mess.”

Interesting?The gold price is approaching production cost again.We have the physical versus paper demarcation again (most commentators are clueless on this – the paper market is still determining the screen price),but it will probably die once and for all this time around.

The greatly under-reported repo market sits at the centre of the banking system and the securities markets. It is a primary source of leverage and, therefore, risk. Time after time, the risks remain hidden until events cascade beyond the point of no return. Stability in the repo market depends on confidence in repo-counterparties (which can evaporate at near light speed, e.g. Lehman, Bear Stearns, MF Global and LongTerm Capital Management), confidence in the valuation of collateral used in repo loans (remember sub-prime etc) and a sufficient pool of acceptable securities (e.g. Treasuries, MBS, etc) which can be pledged as collateral.In stressed market conditions, liquidity crunches, declining collateral values and re-hypothecation (i.e. re-useof the same securities as collateral by more than one party) can undermine this market. This results in capital being wiped out, a run on collateral and the telltale sign of spikes in “fails-to-deliver”, when a scramble to post eligible securities ensues.A surging gold price, backwardations and shortages of physical bullion are proverbial “canaries in the mine” regarding an overstretched system.

Excessive monetary stimulus and low interest rates create financial bubbles. This is the biggest debt bubble in history. It is a potent deflationary force and central banks are forced into deploying increasingly aggressive (offsetting) inflationary forces. The avoidance of a typical deflationary resolution to this economic long (Kondratieff) wave is pushing the existing monetary system beyond the point of no return. The purchasing power of the developed world’s currencies will have to bear the brunt of the “adjustment”. Preparations for this by the BRICS nations, led by China, are advancing rapidly. The end game is an inflationary/currency crisis, dislocation across credit and derivative markets, and the transition to a new monetary system.A new “basket” currency is likely to replace the dollar as the world’s reserve currency. The “Inflationary Deflation” paradox refers to the coming rise in the price of almost everything in conventional money and simultaneous fall in terms of gold.Meanwhile, the historic separation between the physical and “paper” gold markets have moved to a more advanced stage. Backwardation in both the futures and lending markets is occurring with simultaneous drawdowns in the vaults, laying the ground for the next phase in the bull market.

Paul Mylchreest has released the latest MUST READ Thunder Road Report titled Silver: Right Now (probably) the Best Asset in the World. Mylchreest examines silver’s cyclical trends and charts, and suggests silver is ready to place new all-time nominal highs by this August.

For more than a century, the silver price has correlated most closely with a cycle based on the combination of two further statistically significant cycles in silver prices lasting 5.58 years and 31 years, respectively. The next peak in this combined cycle is forecast for July-August 2013, which would imply a new all-time high in the silver price in excess of US$50/oz(the current price is US$31.47/oz.). Having underperformed significantly from their most recent price relative peaks in 2011, the risk/reward trade-off for premier silver mining stocks, like Fresnillo (quoted in London) andPan American Silver (North America) looks favourable.

Paul Mylchreest has released the December Thunder Road Report, titled Inflationary Deflation: Creating a Bubble in New Money. The report is 75 MUST READ pages detailing the END GAME to the largest debt bubble in the history of the world: a massive cost-push hyperinflationary collapse of the US dollar.

This is the biggest debt bubble in history. Each time DEFLATIONARY forces re-assert themselves, offsetting INFLATIONARY forces (monetary stimulus in some form) have to be correspondingly more aggressive to keep systemic failure at bay. The avoidance of a typical deflationary resolution of this Long Wave is incubating a coming wave of inflation. This will not be the conventional demand pull inflation understood by most economists. The end game is an inflationary/currency crisis, dislocation across credit and derivatives markets, and the transition to a new monetary system, with a new reserve currency replacing the dollar. This makes gold and silver the go-to assets for capital preservation.

2013 is shaping up to need another major push on the global reflation trade in the form of colossal amounts of money printing by central banks.When in doubt, it’s fairly certain that central banks can be counted on todo even more of the same. They are also facing an additional headwind which has been overlooked. Beginning next year, new regulations (Dodd-Frank, etc) will require an additional one trillion dollars plus of collateral toback the $648 trillion OTC derivatives market.

THE ANALYSIS AND DISCUSSION PROVIDED ON SILVERDOCTORS IS FOR YOUR EDUCATION AND ENTERTAINMENT ONLY, IT IS NOT RECOMMENDED FOR TRADING PURPOSES. THE DOC IS NOT AN INVESTMENT ADVISER AND INFORMATION OBTAINED HERE SHOULD NOT BE TAKEN FOR PROFESSIONAL INVESTMENT ADVICE. THE COMMENTARY ON SILVERDOCTORS REFLECTS THE OPINIONS OF THE DOC AND OTHER CONTRIBUTING AUTHORS. YOUR OWN DUE DILIGENCE IS RECOMMENDED BEFORE BUYING OR SELLING ANY INVESTMENTS, SECURITIES, OR PRECIOUS METALS. WE DO NOT SHARE IN YOUR PROFITS, AND THUS WILL NOT TAKE RESPONSIBILITY FOR YOUR LOSSES AS WELL.